For anyone trying to choose a financial advisor, Form ADV is an essential point of reference. Form ADV is paperwork that all financial advisor firms that manage more than $25 million must file with the U.S. Securities and Exchange Commission (SEC). The publicly available paperwork includes dozens of pages of information about a firm, including its fee structure, total assets under management, other business activities, any disciplinary issues on record and more.
What Is Form ADV?
Form ADV is officially called the Uniform Application for Investment Adviser Registration and Report by Exempt Reporting Adviser. Any investment advisor that manages more than $25 million must submit this registration document to the U.S. Securities and Exchange Commission and to state securities authorities.
Form ADV includes two parts, both of which provide detailed information about the firm. Part I is a fill-in-the-blank form, and Part II is a brochure written in prose. The first part contains basic facts about the firm, like its fees, client types, assets under management and any disclosures. The second part is more of a narrative about the firm that explains its services, investing approach and any conflicts of interest.
Registered advisors must update their Form ADV annually. The North American Securities Administrators Association (NASAA), backed by the Financial Industry Regulatory Authority (FINRA), reviews the document and approves any changes.
Form ADV Part I
As mentioned before, Part I of Form ADV is a fill-in-the-blank form. It can be as short as 15 pages or as long as more than 100 pages, depending on what information a firm has disclosed.
Form ADV Part I is divided into at least 12 items. The first section establishes basic information about a firm, including its legal name, the name its doing business under, its address, website and phone number.
Item 3 through Item 7 provide a wealth of information for prospective clients. This is where the firm lists:
- Total assets under management
- Total number of accounts
- Number of employees serving in an advisory function
- Percentages of each client type it serves (including individuals versus high-net-worth individuals)
- Compensation arrangements (the fees it charges for its advisory services)
- Advisory activities (whether it provides financial planning, portfolio management, etc.)
- Other business activities (whether it’s also an insurance broker or broker-dealer)
Another highly important section of Form ADV Part I to look at is Item 11. In this item, the firm reveals whether it has any disclosures on record. If it does, the firm must state what its offenses were and whether any supervised persons were involved. The firm must also attach a report at the end of Form ADV Part I providing further detail on any affirmative response.
Form ADV Part II
The SEC often labels this part of Form ADV as “Part 2 Brochures.” Part II of Form ADV is written in plain prose and also contains a table of contents, which makes it easier to navigate than Part I. Like the first part, Part II is divided into various items, with 18 items in total.
- Items 1-8
The first eight items of Form ADV Part II typically contain the most relevant information for prospective clients. The first few items include the cover page, any changes that have occurred since the firm’s last filing and the table of contents. The true beginning of Part II is Item 4, which offers an overview of the firm. This is where you can find the firm’s founding year, its owners and the services it provides.
Items 5 and 6 cover the firm’s fees. Item 5 outlines the exact fees a firm charges for its various services. Item 6 makes clear whether the firm charges performance-based fees or offers side-by-side management.
A particularly important item to consider is Item 7, where the firm describes its typical clients and often lists its account minimum. Item 8 provides a deep dive into the firm’s methods of analysis and investment strategies, as well as a warning of the risks involved with investing. This is where you can gain a better understanding of how the firm invests its clients’ assets and what investment types it typically uses.
- Items 9-18
These items provide information about the firm’s inner-workings and policies. Item 9 provides more details on any disciplinary information, while Item 10 discloses any other financial industry activities and affiliations. You can usually find out in Item 10 whether a firm earns commissions from selling insurance products or securities.
Item 11 is the firm’s code of ethics, and Item 12 details a firm’s brokerage practices. The remaining sections outline a firm’s policies on account reviews, client referrals, custody of clients’ assets, voting client securities and any other relevant financial information.
Why Form ADV Is Important
Form ADV provides a wealth of information about registered firms. Potential clients should always review a firm’s Form ADV before they begin to work with the firm.
While a firm’s website may be a good resource, Form ADV takes a deeper dive. The SEC paperwork provides information that most firms don’t provide on their websites, such as whether they have any disclosures, charge performance-based fees or earn commissions from selling products to clients. It may not always be clear when a firm last updated its website, but firms must update Form ADV annually.
How To Access Form ADV
Form ADV is publicly available through the SEC’s Investment Advisor Public Disclosure website. On this website, you can search for individual advisor and advisory firms by either the firm or advisor’s name or their CRD number. This number is assigned to every registered representative licensed to sell securities in the U.S. CRD stands for Central Registration Depository, a database that contains information about firms and brokers.
Many firms also provide a link to their Form ADV on their websites. Any registered representative should be able to produce a copy of this paperwork if you request it.
Tips for Choosing a Financial Advisor
- Look for a fiduciary. Notably, any firm that is registered with the SEC is bound by fiduciary duty, which means it must act in clients’ best interests at all times.
- Consider an advisor’s specialties and certifications. A certified financial planner (CFP) is one of the most prestigious designations and requires extensive experience and effort to obtain.
- Ask for recommendations. SmartAsset’s financial advisor matching tool is a good place to start. Once you answer a series of questions about your current financial situation and goals, our program will pair you with up to three advisors in your area who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
Photo credit: ©iStock.com/JohnnyGreig, https://adviserinfo.sec.gov/